Securities – Oil & Gas Law Reporthttps://www.oilandgaslawreport.com
Reporting on recent legal developments and trends in the oil and gas industryMon, 07 Jan 2019 18:08:32 +0000en-UShourly1https://wordpress.org/?v=4.9.9Utah decision highlights unregistered finder risks in sale of oil and gas investmentshttps://www.oilandgaslawreport.com/2014/04/28/utah-decision-highlights-unregistered-finder-risks-in-sale-of-oil-and-gas-investments/
Mon, 28 Apr 2014 10:41:31 +0000http://www.oilandgaslawreport.com/?p=2373As we have noted previously, the sale to investors of interests in an oil and gas venture typically involves the sale of a security under federal and state securities laws, regardless of whether the investment vehicle is stock, a limited partnership or limited liability company interest, or even a fractional undivided interest in a lease (such as a working interest) if the investor is relying on someone else to manage operations. A corollary of this principle is that persons involved in marketing and selling the investment, if they receive compensation based on the transaction, must be licensed as a broker under state and federal securities laws. The lore that an unregistered “finder” can perform such services is mostly just that — lore. For the issuer, the consequence may well be loss of an exemption from registration and rescission claims from investors. For the “finder” it may mean that his contract is not enforceable.

In Legacy Resources, Inc. v. Liberty Pioneer Energy Source, Inc. (No. 20120142, Dec. 20, 2013), the Utah Supreme Court held that a finder of investors for a prospective oil and gas project could not enforce an agent agreement with the issuer because the finder acted as an unregistered broker in violation of the Utah’s state securities laws. The court noted that the record contained undisputed evidence that the finder:

As we have noted previously, the sale to investors of interests in an oil and gas venture typically involves the sale of a security under federal and state securities laws, regardless of whether the investment vehicle is stock, a limited partnership or limited liability company interest, or even a fractional undivided interest in a lease (such as a working interest) if the investor is relying on someone else to manage operations. A corollary of this principle is that persons involved in marketing and selling the investment, if they receive compensation based on the transaction, must be licensed as a broker under state and federal securities laws. The lore that an unregistered “finder” can perform such services is mostly just that — lore. For the issuer, the consequence may well be loss of an exemption from registration and rescission claims from investors. For the “finder” it may mean that his contract is not enforceable.

In Legacy Resources, Inc. v. Liberty Pioneer Energy Source, Inc. (No. 20120142, Dec. 20, 2013), the Utah Supreme Court held that a finder of investors for a prospective oil and gas project could not enforce an agent agreement with the issuer because the finder acted as an unregistered broker in violation of the Utah’s state securities laws. The court noted that the record contained undisputed evidence that the finder:

accepted transaction-based compensation;

provided opinions regarding the merits of the project;

actively recruited investors;

participated in refining marketing materials;

answered investor questions about the project;

offered to accompany investors to the issuer’s offices to look at seismic data;

occasionally accepted payment and other documents from investors; and

remained the primary contact for the project for some investors, even after they had invested.

The finder was, thus, involved in the securities transactions at issue at key points in the chain of distribution, sought to influence investors’ decisions, and functioned as the go-between for the issuer and potential investors. As the finder’s efforts were geared toward effecting an investment, and not just initiating a business contact, the finder acted as an unlicensed broker in violation of Utah law, and was, therefore, barred from enforcing the contract.

The same result would be reached under the securities laws of most states, and under federal securities laws. So, be careful of persons who represent that they can find investors for your deal and want to be paid a commission or similar transaction-based compensation, but do not hold the necessary licenses.

]]>SEC will redraft, not appeal, district court rejection of resource extraction issuer payment disclosure ruleshttps://www.oilandgaslawreport.com/2013/09/06/sec-will-redraft-not-appeal-district-court-rejection-of-resource-extraction-issuer-payment-disclosure-rules/
Fri, 06 Sep 2013 13:36:14 +0000http://www.oilandgaslawreport.com/?p=2068We wrote previously about the United States District Court for the District of Columbia vacating Securities and Exchange Commission Rule 13q-1, which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The SEC announced Sept. 3, 2013 that it would not appeal the court’s decision and would instead redraft the rule, taking into account the court’s concerns, and restart the rulemaking process.

The court had found that:

The SEC erroneously read the statutory language as requiring public disclosure of these payments; and

The SEC’s decision to deny any exemption to the disclosure requirements, specifically in the case of countries that prohibit disclosure of these payments, was arbitrary and capricious.

We wrote previously about the United States District Court for the District of Columbia vacating Securities and Exchange Commission Rule 13q-1, which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The SEC announced Sept. 3, 2013 that it would not appeal the court’s decision and would instead redraft the rule, taking into account the court’s concerns, and restart the rulemaking process.

The court had found that:

The SEC erroneously read the statutory language as requiring public disclosure of these payments; and

The SEC’s decision to deny any exemption to the disclosure requirements, specifically in the case of countries that prohibit disclosure of these payments, was arbitrary and capricious.

The SEC has not provided a timetable for the redraft of the rule.

]]>District Court Vacates Resource Extraction Issuer Payment Disclosure Rules; May Foreshadow Ruling on Conflict Minerals Challengehttps://www.oilandgaslawreport.com/2013/07/03/district-court-vacates-resource-extraction-issuer-payment-disclosure-rules-may-foreshadow-ruling-on-conflict-minerals-challenge/
Wed, 03 Jul 2013 21:46:46 +0000http://www.oilandgaslawreport.com/?p=1984On July 2, 2013, the United States District Court for the District of Columbia vacated Securities and Exchange Commission (SEC) Rule 13q-1, which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The court found:

the SEC erroneously read the statutory language as requiring public disclosure of these payments; and

the SEC’s decision to deny any exemption to the disclosure requirements, specifically in the case of countries that prohibit disclosure of these payments, was arbitrary and capricious.

Background

Rule 13q-1 was promulgated in August 2012 pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1504 of Dodd-Frank directed the SEC to issue final rules that require each publicly traded issuer that engages in the commercial development of oil, natural gas, or minerals (a “resource extraction issuer”) to annually report information relating to any payment made to a foreign government or the U.S. government for the purpose of the commercial development of oil, natural gas or minerals. In this annual report, the issuers must disclose the type and total amount of payments made for each project and to each government. Under Section 1504 of Dodd-Frank, the payment information must be “submitted in an interactive data format” and “[t]o the extent practicable, the [SEC] shall make available online, to the public, a compilation of the information required to be submitted [in the annual report].”

On July 2, 2013, the United States District Court for the District of Columbia vacated Securities and Exchange Commission (SEC) Rule 13q-1, which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The court found:

the SEC erroneously read the statutory language as requiring public disclosure of these payments; and

the SEC’s decision to deny any exemption to the disclosure requirements, specifically in the case of countries that prohibit disclosure of these payments, was arbitrary and capricious.

Background

Rule 13q-1 was promulgated in August 2012 pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1504 of Dodd-Frank directed the SEC to issue final rules that require each publicly traded issuer that engages in the commercial development of oil, natural gas, or minerals (a “resource extraction issuer”) to annually report information relating to any payment made to a foreign government or the U.S. government for the purpose of the commercial development of oil, natural gas or minerals. In this annual report, the issuers must disclose the type and total amount of payments made for each project and to each government. Under Section 1504 of Dodd-Frank, the payment information must be “submitted in an interactive data format” and “[t]o the extent practicable, the [SEC] shall make available online, to the public, a compilation of the information required to be submitted [in the annual report].”

In October 2012, the American Petroleum Institute and other trade groups filed a lawsuit challenging the Rule under the First Amendment and the Administrative Procedures Act

Court Decision

The court rejected the SEC’s position that the “annual report” language of Section 1504 of Dodd-Frank compelled a public filing of each resource extraction issuer’s annual report of payment information. Further, the “compilation” of information to be made available online under Section 1504 of Dodd-Frank referred only to a summary or anonymous subset of payment information submitted privately to the SEC, rather than a complete collection of independent, unedited and identifiable reports of each resource extraction issuer.

The court also found that the SEC made another serious error by denying an exemption for countries that prohibit payment disclosure. Commenters to the rule expressed concern about potential losses of many billions of dollars in four countries —Angola, Cameroon, China, and Qatar — which prohibit disclosure of payment information. The SEC argued that it declined to adopt an exemption for countries prohibiting disclosure because such an exemption would be inconsistent with the structure and language of Section 1504 of Dodd-Frank. The court found that given the burdens on competition and investors associated with its decision to decline an exemption for these four countries, and the fact that billions of dollars were on the line, the SEC should have undertaken a more specific analysis with respect to the exemption for these four countries rather than rely on what the SEC perceived to be the broad purpose of Section 1504 of Dodd-Frank. Therefore, the court found that the SEC’s decision to deny the exemption was arbitrary and capricious and not the product of reasoned decision making.

Based on the above mentioned reasons, the court vacated the rule and remanded it to the SEC for revision consistent with the Court’s opinion; i.e.:

no public disclosure of a resource extraction issuer’s annual report of payments, and

consideration by the SEC of an exemption for countries that prohibit payment disclosure.

For all resource extraction issuers, the rule is vacated in its entirety and will not have to be complied with until it is reissued by the SEC.

For all resource extraction issuers, when the rule is reissued, it will no longer require public disclosure of its annual report regarding the type and total amount of payments to foreign governments or the U.S. government for purpose of resource extraction. This will preserve the confidentiality of sensitive commercial information.

For resource extraction issuers doing business in Angola, Cameroon, China and Qatar, the SEC will consider an exemption to the Rule for payments made to these countries. If the SEC includes this exemption when it reissues the Rule, resource extraction issuers will not be forced to withdraw from these countries and will be able to retain billions of dollars of business.

For all other private and public companies, the SEC is in the process of defending its conflict minerals rules issued under Section 1502 of Dodd-Frank in front of the same Court and using many of the same arguments as it did in its defense of the Rule. This decision provides some insight into the Court’s thinking and may foreshadow the Court’s ruling on the challenge to the conflict minerals rules.

]]>SEC Updates: Staying Ahead of the Regulatory Curvehttps://www.oilandgaslawreport.com/2013/06/26/sec-updates-staying-ahead-of-the-regulatory-curve/
Wed, 26 Jun 2013 18:40:08 +0000http://www.oilandgaslawreport.com/?p=1956Our colleagues on the Federal Securities Law Blog have been tracking new and updated SEC regulations that are likely to have an impact on your business now and in the near future. The compilation of articles in their most recent eBook — SEC Updates: Staying Ahead of the Regulatory Curve — discuss three important SEC regulatory changes: compensation committee rules, conflict minerals reporting and whether companies that use social media to communicate with investors are complying with Regulation Fair Disclosure.

Our colleagues on the Federal Securities Law Blog have been tracking new and updated SEC regulations that are likely to have an impact on your business now and in the near future. The compilation of articles in their most recent eBook — SEC Updates: Staying Ahead of the Regulatory Curve — discuss three important SEC regulatory changes: compensation committee rules, conflict minerals reporting and whether companies that use social media to communicate with investors are complying with Regulation Fair Disclosure.

At the federal level, the U.S. Securities and Exchange Commission (SEC) issued an investor alert aimed at private oil and gas offerings. In addition to the usual cautions to investors to do their homework on these deals, the SEC encouraged investors to verify that the person offering the investment is licensed as a broker-dealer. The SEC recently stepped up its efforts to pursue “finders” and other unlicensed persons compensated by issuers to assist in finding investors. Companies raising investment funds need to understand that persons who they engage to assist in selling investments are required to have a securities license. Failure to do so exposes the issuer to civil liability, including rescission claims by investors, and potential criminal liability in cases where material misstatements or omissions are made in the private placement memorandum or other offering material, or other fraudulent activity is present. The investor alert cites several examples of recent enforcement actions where such illegal activity was involved.

At the state level, the North American Securities Administrators Association (as the name implies, an association in which all the securities administrators are members), recently issued a similar investor alert. This covers much of the same ground as the SEC investor alert, but focuses more on recommended investor due diligence.

At the federal level, the U.S. Securities and Exchange Commission (SEC) issued an investor alert aimed at private oil and gas offerings. In addition to the usual cautions to investors to do their homework on these deals, the SEC encouraged investors to verify that the person offering the investment is licensed as a broker-dealer. The SEC recently stepped up its efforts to pursue “finders” and other unlicensed persons compensated by issuers to assist in finding investors. Companies raising investment funds need to understand that persons who they engage to assist in selling investments are required to have a securities license. Failure to do so exposes the issuer to civil liability, including rescission claims by investors, and potential criminal liability in cases where material misstatements or omissions are made in the private placement memorandum or other offering material, or other fraudulent activity is present. The investor alert cites several examples of recent enforcement actions where such illegal activity was involved.

At the state level, the North American Securities Administrators Association (as the name implies, an association in which all the securities administrators are members), recently issued a similar investor alert. This covers much of the same ground as the SEC investor alert, but focuses more on recommended investor due diligence.

Though these alerts are directed at investors, they are useful to issuers and their advisors in two respects:

They highlight compliance issues that need to be addressed in any oil and gas securities offering, and

They offer guidance on key disclosures unique to oil and gas offerings that should be included in any private placement memorandum or similar disclosure document.

These investor alerts suggest that federal and state securities regulators are giving heightened scrutiny to offerings of oil and gas investments. Issuers and other participants would be well advised to examine their offering processes and disclosure documents with an eye toward compliance with the securities laws.

]]>The sale of oil and gas working interests is the sale of a securityhttps://www.oilandgaslawreport.com/2012/09/06/the-sale-of-oil-gas-working-interests-is-the-sale-of-a-security/
Thu, 06 Sep 2012 17:25:13 +0000http://www.oilandgaslawreport.com/?p=644It is unfortunately commonplace for many participants in the oil and gas industry, particularly in the sale of interests in oil and gas production activities, to ignore the requirements of federal and state securities laws applicable to these activities. However, the sale of an oil & gas working interest is the sale of a “security” under the securities laws, and the disclosure requirements of these laws apply just the same as the would in the sale of stock or an interest in a limited liability company.

Non-operating working interests in oil and gas leases are “securities” under the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), and the Ohio Securities Act (“OSA”) because (i) working interests are “fractional undivided interest[s] in oil, gas or other mineral rights” [1] or “interests in or under oil, gas or mining leases” [2] and (ii) working interests coupled with an operating agreement and a promotional scheme are “investment contracts” under thes provisions. A non-operating working interest owner in an oil and gas lease (“NWI”) is an undivided co-owner and tenant in common with the other working interest owners in an oil and gas lease. By definition, a NWI owns (i) a “fractional undivided interest in oil, gas, or other mineral rights” under the Securities Act, (ii) a “participation in . . . any oil, gas, or other mineral royalty or lease” under the Exchange Act, and (iii) an “interest[ ] in or under oil, gas or mining …

It is unfortunately commonplace for many participants in the oil and gas industry, particularly in the sale of interests in oil and gas production activities, to ignore the requirements of federal and state securities laws applicable to these activities. However, the sale of an oil & gas working interest is the sale of a “security” under the securities laws, and the disclosure requirements of these laws apply just the same as the would in the sale of stock or an interest in a limited liability company.

Non-operating working interests in oil and gas leases are “securities” under the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), and the Ohio Securities Act (“OSA”) because (i) working interests are “fractional undivided interest[s] in oil, gas or other mineral rights” [1] or “interests in or under oil, gas or mining leases” [2] and (ii) working interests coupled with an operating agreement and a promotional scheme are “investment contracts” under thes provisions. A non-operating working interest owner in an oil and gas lease (“NWI”) is an undivided co-owner and tenant in common with the other working interest owners in an oil and gas lease. By definition, a NWI owns (i) a “fractional undivided interest in oil, gas, or other mineral rights” under the Securities Act, (ii) a “participation in . . . any oil, gas, or other mineral royalty or lease” under the Exchange Act, and (iii) an “interest[ ] in or under oil, gas or mining leases” under the OSA. Of course, a participation in an oil and gas lease in the form of a limited partnership interest or non-managing membership interest in a limited liability company is also a security.

The principal consequences of this are basically three:

unless an exemption from registration applies, the sale of the security is subject to the registration requirements of the Securities Act and the OSA;

even if the sale qualifies for an exemption, full and fair disclosure of all material facts relating to the investment must be made to the purchaser, and

a person who effects the sale of the security on behalf of the issuer may have to be licensed as a broker-dealer or affiliated salesperson.

In addition to giving the purchaser a rescission claim (i.e., “give me my money back, plus interest”) against any participant in the transaction, a sale that does not comply with the requirements of the securities laws exposes participants to both civil and criminal enforcement actions.

The securities laws are complex, and any person contemplating raising funds from investors through the sale of fractional working interest participations in one or more leases or wells would be well advised to discuss the proposed offering with a securities lawyer before proceeding. In many cases, there will be exemptions from registration available, and various ways in which the required disclosures can be provided to investors, but there are fairly detailed technical requirements that must be complied with in each case, making consultation with a securities lawyer a must.

[1] Securities Act, Section 2(a)(1).

[2] OSA, Section 1707.01(B)

]]>SEC Adopts Final Rules Requiring Payment Disclosures by Resource Extraction Issuershttps://www.oilandgaslawreport.com/2012/09/06/sec-adopts-final-rules-requiring-payment-disclosures-by-resource-extraction-issuers/
Thu, 06 Sep 2012 14:24:35 +0000http://www.oilandgaslawreport.com/?p=633The Securities and Exchange Commission (“SEC”) recently adopted a final rule pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requiring resource extraction issuers (companies engaged in the development of oil, natural gas, or minerals)to disclose in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the U.S. government for the purpose of the commercial development of oil, natural gas, or minerals. Section 1504 added Section 13(q) to the Securities Exchange Act of 1934 (the “Exchange Act”), which requires the SEC to promulgate rules requiring disclosure to be made by resource extraction issuers annually by filing a Form SD with the SEC.

The Securities and Exchange Commission (“SEC”) recently adopted a final rule pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requiring resource extraction issuers (companies engaged in the development of oil, natural gas, or minerals)to disclose in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the U.S. government for the purpose of the commercial development of oil, natural gas, or minerals. Section 1504 added Section 13(q) to the Securities Exchange Act of 1934 (the “Exchange Act”), which requires the SEC to promulgate rules requiring disclosure to be made by resource extraction issuers annually by filing a Form SD with the SEC.